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FRC’s Response to IASB’s Exposure Draft Addendum to the Exposure Draft Third edition of the IFRS for SMEs Accounting Standard
Dr Andreas Barckow IASB Chair IFRS Foundation Columbus Building 7 Westferry Circus Canary Wharf London E14 4HD
19 July 2024
Exposure Draft IASB/ED/2024/2 Addendum to the Exposure Draft Third edition of the IFRS for SMEs Accounting Standard
Dear Andreas,
I am writing on behalf of the UK's Financial Reporting Council (FRC) in response to the above Exposure Draft.
This response draws on the FRC's experience in developing financial reporting standards applicable in the UK and Republic of Ireland. The FRC's overriding objective in developing financial reporting standards is to enable users of accounts to receive high-quality understandable financial reporting proportionate to the size and complexity of the entity and users' information needs. In achieving its overriding objective, the FRC aims to provide succinct financial reporting standards that, amongst other things, have consistency with global accounting standards through the application of an IFRS-based solution unless an alternative clearly better meets the overriding objective.
The FRC's accounting standards include FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. The requirements in FRS 102 were originally based on the IFRS for SMEs Accounting Standard, modified in terms of the scope of entities eligible to apply it, the accounting treatments provided, and the required disclosures.1 In some instances, those modifications include incorporating requirements that are consistent with IFRS Accounting Standards.
In March 2024, the FRC issued Amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs – Periodic Review 20242, which included amendments to introduce disclosure requirements about supplier finance arrangements into FRS 102. In our comments we suggest some improvements to your proposals that are consistent with our final amendments and reflect the feedback we received from our stakeholders about the proportionality of the requirements.
In relation to the proposed amendments about lack of exchangeability, we think the proposals could be significantly simplified—providing some flexibility to preparers of financial statements—whilst still delivering the principles of the IASB's alignment approach.
Our comments in response to your questions are included in the Appendix. If you have any queries or would like to discuss our comments in more detail, please do not hesitate to contact Stephen Maloney (Senior Project Director) or Adrian Wallis (Project Director) at [email protected].
Yours sincerely
Mark Babington Executive Director, Regulatory Standards Direct telephone line: 020 7492 2323 Email: [email protected]
Name of Respondent: Mark Babington Organisation: Financial Reporting Council Jurisdiction: United Kingdom Correspondence and/or email address: [email protected]
Question 1—Supplier finance arrangements—Scope and disclosure requirements (proposed new paragraphs 7.19B–7.19C)
In March 2024, as part of the Periodic Review 2024,3 the FRC issued amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland that introduce new disclosure requirements to provide users of financial statements with additional information about an entity's use of supplier finance arrangements and the effect of such arrangements on the entity's financial position and cash flows.
Like the IASB's proposals in IASB/ED/2024/2 Addendum to the Exposure Draft Third edition of the IFRS for SMEs Accounting Standard, the FRC's amendments were based on the outcome of the IASB's Supplier Finance Arrangements4 project.
The FRC expects the disclosure requirements in FRS 102 to provide relevant information to users of financial statements, and most respondents to our consultation about introducing the disclosure requirements5 agreed with that assessment.
We think that our solution would be a good basis for the requirements in the IFRS for SMEs Accounting Standard. Against the relevant paragraphs below, we set out how the FRC's amendments to FRS 102 differ from the IASB's proposals in the Exposure Draft and the matters we think could be relevant to the IASB's alignment approach for the IFRS for SMEs Accounting Standard:
Proposed new paragraph 7.19B describes the characteristics of an arrangement about which an SME would be required to disclose the information described in this exposure draft. Paragraph 7.19B also sets out examples of the various forms of such arrangements that would be within the scope of the proposals.
> Paragraph 7.20B of FRS 102 is identical to proposed paragraph 7.19B of the IFRS for SMEs Accounting Standard except that the former also includes the final sentence of paragraph 44G of IAS 7 Statement of Cash Flows, which states that 'arrangements that are solely credit enhancements for the entity (eg financial guarantee contracts) or instruments used to settle directly with a supplier the amounts owed (eg credit cards) are not supplier finance arrangements'. We think that this guidance would be relevant to SMEs because financial guarantees and corporate credit cards are not uncommon and without that sentence an entity might conclude that, or spend unnecessary time considering whether, those arrangements have the characteristics of a supplier finance arrangement.
The IASB proposes an SME disclose in aggregate for its supplier finance arrangements:
- the terms and conditions (but disclosing separately the terms and conditions of arrangements with dissimilar terms and conditions);
> Paragraph 7.20C(a) of FRS 102 only requires disclosure of the 'key' terms and conditions of supplier finance arrangements. We think that this is a suitable simplification of IAS 7 that would help ensure the requirement and the disclosures made are proportionate.
> A respondent to our consultation thought that information about interest charges would be very relevant for users and would help them understand the cost of supplier financing in comparison to the cost of other financing arrangements used by the entity. We agreed with their suggestion, and paragraph 7.20C(a) of FRS 102 cites 'interest charges' as an example of a key term of supplier finance arrangements.
- as at the beginning and end of the reporting period:
- the carrying amounts, and associated line items presented in the SME's statement of financial position, of the financial liabilities that are part of a supplier finance arrangement;
> Paragraph 7.20C(b) of FRS 102 does not require the disclosures to be given as at the beginning of the reporting period. We think that information about opening balances is not usually needed to assess changes during the period (the purpose of this requirement as set out in the BC9(e) of the Exposure Draft) due to the requirement in paragraph 3.14 for an entity to disclose comparative information as at the end of the preceding reporting period, and therefore a simplification compared to IAS 7 can be made.
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- the carrying amounts, and associated line items, of the financial liabilities required to be disclosed (as described in the preceding subparagraph) for which suppliers have already received payment from the finance providers; and
> FRS 102 does not include an equivalent requirement to paragraph 7.20C(b)(ii) (amounts settled by finance providers with suppliers). See our response to question 2.
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- the range of payment due dates for both the financial liabilities that would be required to be disclosed (as described in (i)) and comparable trade payables that are not part of the supplier finance arrangement; and
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- the type and effect of non-cash changes in the carrying amounts of the financial liabilities that would be required to be disclosed (as described in (b)(i)).
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Paragraphs BC1–BC12 of the Basis for Conclusions explain the IASB's rationale for these proposals.
Do you have comments or suggestions on the proposed amendments to Section 7? Please explain the reasons for your suggestions.
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Question 2—Supplier finance arrangements—Costs of applying proposed new paragraph 7.19C(b)(ii)
Some stakeholders informed the IASB that some information about supplier finance arrangements might not be readily available and might be costly to obtain. In particular, information about the carrying amounts, and associated line items, of the financial liabilities that are part of such arrangements and for which suppliers have already received payment from the finance providers (proposed new paragraph 7.19C(b)(ii)) might not be readily available.
Paragraphs BC13–BC15 of the Basis for Conclusions provide information about the potential costs of complying with the proposed disclosure requirement and explain the IASB's rationale for this proposal.
Do you agree that the benefits for users of SMEs' financial statements would outweigh the potential costs for SMEs to provide the information required by proposed new paragraph 7.19C(b)(ii)? Please explain the reasons for your view.
> In FRED 84 Draft amendments to FRS 102 – Supplier finance arrangements6, the FRC proposed to introduce a similar requirement into FRS 102. Respondents to our consultation (accountancy firms and accountancy professional bodies) had mixed views on whether that requirement would be cost-beneficial. Respondents in support felt that the disclosure would provide useful information, and that the fact that a similar disclosure requirement exists in IAS 7 should make the information easier to obtain. Those that disagreed cited a lack of relevance and usefulness, and concerns that obtaining the required information and having it audited would be onerous and costly. Given respondents' mixed views, and in the interests of proportionality, the FRC omitted the proposed disclosure requirement from the final amendments to FRS 102.
> The FRC's original proposal would not have required the disclosure to be made by a small entity or by a qualifying entity (broadly, a member of a group that prepares consolidated financial statements) in its individual financial statements, as part of the reduced disclosure options that exist in FRS 102 for such entities. Micro-entities applying FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime also do not have to make the disclosure. Given the scope of the IFRS for SMEs Accounting Standard, and that it does not include reduced disclosure options, the proposals in this Exposure Draft would apply to such entities, and we think that the concerns noted above would therefore apply to a greater extent to the proposals in this Exposure Draft than they did to our proposals for FRS 102.
> Overall, we do not think that the benefits of the proposed disclosure requirement would outweigh the potential costs.
Question 3—Lack of exchangeability (proposed new paragraphs 30.5A, 30.28–30.29 and 30A.1–30A.18)
Section 30 of the IFRS for SMEs Accounting Standard generally requires the use of a spot exchange rate when an SME reports foreign currency transactions or a foreign operation's results and financial position in its financial statements. However, it does not specify the exchange rate to use when there is a lack of exchangeability between two currencies. To address this deficiency, the IASB proposes to amend Section 30 of the Standard:
- to specify when a currency is exchangeable into another currency;
- to set out the factors an SME is required to consider in assessing exchangeability and to specify how those factors affect the assessment;
- to specify how an SME determines the spot exchange rate when a currency is not exchangeable into another currency; and
- to require an SME to disclose information that would enable users of its financial statements to understand how a lack of exchangeability between two currencies affects, or is expected to affect, its financial performance, financial position and cash flows.
> At this time, we think that lack of exchangeability between two currencies is unlikely to be a prevalent issue for UK and Irish entities because most transactions are carried out, and financial statements presented in, sterling or euro respectively, and spot exchange rates from commonly used foreign currencies are routinely available. Therefore, the FRC has not made or proposed any associated amendment to FRS 102. However, we acknowledge that the issue is likely to be relevant in some jurisdictions and therefore understand the IASB's rationale for addressing the topic in the IFRS for SMEs Accounting Standard.
Paragraphs 30A.1–30A.11 of [draft] Appendix A to Section 30 of the Standard set out the factors an SME would be required to consider in assessing exchangeability and specify how those factors would affect the assessment.
> Whilst FRS 102 does not specify how an entity determines a 'spot exchange rate' or define that term, we think that paragraphs 10.2 to 10.6 (selection and application of accounting policies) would result in an entity developing an appropriate accounting policy when there is a lack of exchangeability between two currencies, which could be consistent with the requirements of IFRS Accounting Standards. When different entities take different approaches to estimating spot exchange rates we think this is unlikely to lead to significant comparability issues, given the overarching constraints in paragraph 10.4, and any differences that do arise are unlikely to be more of an issue than those caused by the existing practical expedient in paragraph 30.8, which allows an entity to use an exchange rate that approximates the actual exchange rate at the date of the transaction. We think that these factors are likely also to apply to entities applying the IFRS for SMEs Accounting Standard and that it is therefore not necessary to include detailed Application Guidance as Appendix A to Section 30. The requirement and objective set out in proposed paragraph 30.5A should be sufficient to satisfy the IASB's alignment approach.
Paragraphs 30A.12–30A.18 of [draft] Appendix A to Section 30 of the Standard provide application guidance that would help an SME estimate the spot exchange rate when a currency is not exchangeable into another currency.
> In other sections of the IFRS for SMEs Accounting Standard that are being amended in the Second Comprehensive Review (for example, Section 23 Revenue from Contracts with Customers and Section 12 Fair Value Measurement) the IASB has decided not to include appendices and instead to develop educational material. We think that a similar approach would be appropriate for this topic.
Paragraphs BC18–BC39 of the Basis for Conclusions explain the IASB's rationale for these proposals.
> The term 'exchangeable' is used several times in the proposed requirements and is defined in proposed paragraphs 30A.2 to 30A.4 of the Application Guidance. We think that it would be more consistent with the approach taken in the rest of the IFRS for SMEs Accounting Standard for the term to be defined in the Glossary.
Do you have comments or suggestions on the proposed amendments to Section 30? Please explain the reasons for your suggestions.
> We agree with the approach that the IASB has taken to developing disclosure requirements (set out in paragraphs BC36 to BC39 of the Exposure Draft) However, we think that proposed paragraph 30.28(d) could be simplified further—to require only disclosure of the spot exchange rates used—because the information provided in applying proposed paragraph 30.28(e) would already give users sufficient information about the nature of estimated spot exchange rates.
Do you agree that the proposals in paragraphs 30A.1–30A.18 of [draft] Appendix A to Section 30 would provide sufficient application guidance for SMEs? If you disagree with these proposals, please explain what you would suggest instead and why.
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Question 4—Effective date and transition (proposed new paragraph A37A)
The IASB proposes:
- that the amended Section 7 and Section 30 of the IFRS for SMEs Accounting Standard have the same effective date as that of the third edition of the Standard;7
- no transition relief in relation to the amendments to Section 7 of the Standard; and
- specific transition requirements in relation to the amendments to Section 30 of the Standard.
> The FRC's amendments to FRS 102 to introduce supplier finance disclosures have an earlier effective date (1 January 2025, ie approximately one year from the issue date) than the rest of the amendments arising from the Periodic Review 2024. We think that where such arrangements exist, the information would be useful to users of financial statements and entities should not need a significant amount of time to prepare it.
Proposed new paragraph A37A of Appendix A to the Standard sets out transition requirements for the amendments to Section 30 of the Standard.
> The FRC did, however, include a transitional expedient (paragraph 1.42 of FRS 102) to not require, in the first year of application, comparative information in respect of the disclosures required by sub-paragraphs 7.19C(a), 7.20C(b)(iii) and 7.20C(c) of FRS 102. An effective date that is two years after the issue date is equivalent, in terms of the information that a preparer needs to gather, to an effective date that is one year after the issue date with an exemption from providing comparative information, except that in the latter case some information is available to users one year earlier. We therefore think that the IASB should consider this approach to provide users of financial statements with the information as soon as possible.
Paragraphs BC16–BC17 and paragraphs BC40–BC44 of the Basis for Conclusions explain the IASB's rationale for these proposals.
> For the amendments to Section 30, we agree with the IASB's proposal to apply the same transition requirements as those for entities applying the corresponding amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates. And we agree with the IASB's proposal to provide no specific transition requirements for a first-time adopter of the IFRS for SMEs Accounting Standard.
Do you agree with these proposals? Why or why not? If you disagree with these proposals, please explain what you would suggest instead and why.
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For details, refer to the Significant differences between FRS 102 and the IFRS for SMEs Accounting Standard available at: https://www.frc.org.uk/library/standards-codes-policy/accounting-and-reporting/uk-accounting-standards/uk-accounting-standards-overview/significant-differences-between-frs-102-and-the-ifrs-for-smes-accounting-standard/ ↩
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Available at: https://www.frc.org.uk/library/standards-codes-policy/accounting-and-reporting/uk-accounting-standards/frs-102/ ↩
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https://www.frc.org.uk/news-and-events/news/2024/03/frc-revises-uk-and-ireland-accounting-standards/ ↩
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https://www.ifrs.org/projects/completed-projects/2023/supplier-finance-arrangements/ ↩
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FRED 84 Draft amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland – Supplier finance arrangements available at https://www.frc.org.uk/consultations/fred-84/ ↩
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https://www.frc.org.uk/consultations/fred-84/ ↩
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In the Exposure Draft Third edition of the IFRS for SMEs Accounting Standard the IASB proposed that the effective date of the third edition of the Standard be a minimum of two years from the issue date, with early application permitted. ↩